3-1 The Global Marketplace Chapter 3. Chapter 3 Objectives Explain why nations trade and describe how international trade is measured. Discuss the nature

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The Global Marketplace

Chapter 3

Chapter 3 Objectives

• Explain why nations trade and describe how international trade is measured.

• Discuss the nature of conflicts in global business, including free trade, fair trade, and government interventions into international trade.

• Identify the major organizations that facilitate international trade and the major trading blocs around the world.

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Chapter 3 Objectives, Cont.

• Discuss the importance of understanding cultural and legal differences in the global business environment.

• Define the major forms of international business activity.

• Discuss the strategic choices that must be considered before entering international markets.

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Fundamentals of International Trade

• Where are your products manufactured?

• What countries are the most competitive in the world?

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Why Nations Trade

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Expand marketsExpand markets

Focus on relative strengthsFocus on relative strengths Acquire materials, goods, services

Acquire materials, goods, services

Keep up with competitors Keep up with competitors

Keep up with customersKeep up with customers

Pursue economies of scalePursue economies of scale

Economic globalization: The increasing integration and interdependence of national economies around the world

How International Trade is Measured

Balance of Trade Balance of Payments

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Balance of Trade

Balance of trade: Total value of the products a nation exports minus the total value of the products it imports, calculated over a period of time

Trade surplus: A favorable trade balance created when a country exports more than it imports

Trade deficit :An unfavorable trade balance created when a country imports more than it exports

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Balance of Payments

Balance of payments: The sum of all payments a country receives from other countries minus the sum of all payments it makes to the other countries, over some specified period of time

The balance of payments includes the balance of

trade plus the net dollars received and spent on

foreign investment, military expenditures, tourism,

foreign aid, and other international transactions.

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Foreign Exchange Rates

When companies buy and sell goods and services in the global marketplace, they complete the transaction by exchanging currencies. The process is called foreign exchange, the conversion of one currency into an equivalent amount of another currency.

The number of units of one currency that must be exchanged for a unit of the second currency is known as the exchange rate between the currencies.

Exchange rate: The rate at which the money of one country is traded for the money of another

Foreign Exchange Rates and Currency Valuations

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Strong and Weak Currencies: Who Gains and Who Loses?

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Conflicts in International Trade

Free Trade: International trade unencumbered by restrictive measures.

Supporters of free trade generally acknowledge that it produces winners and losers but that the winners gain more than the losers lose, so the net effect is positive

Fair Trade: Buyers voluntarily agree to pay more than the prevailing market price in order to help producers earn a living wage.

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Government Intervention in International Trade

• Tariffs

• Quotas

• Embargoes

• Sanctions

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Protectionism: Government policies aimed at shielding a country’s industries from foreign competition

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Tariffs are taxes, surcharges, or duties levied

against imported goods.

Quotas limit the amount of a particular good

that countries can import during a given year.

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In its most extreme form, a quota becomes an

embargo, a complete ban on the import or

export of certain products.

Sanctions are politically motivated embargoes

that revoke a country's normal trade relations

status; they are often used as forceful alternatives

short of war.

• Restrictive Import Standards

• Subsidies

• Dumping

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Government Intervention in International Trade (Cont.)

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Countries can assist their domestic producers by

establishing restrictive import standards,

such as requiring special licenses for doing certain

kinds of business and then making it difficult for

foreign companies to obtain such a license.

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Export subsidies:

A form of financial assistance, in which producers

receive enough money from the government to allow

them to lower their prices, in order to compete more

effectively in the global market

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Dumping: Charging less than the actual cost or less than

the home-country price for goods sold in other countries

Often used to win foreign customers or reduce production surpluses.

Most industrialized countries have antidumping regulations.

International Trade Organizations

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The General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade (GATT) is a worldwide pact that was first established in the aftermath of World War II.

In 1995 GATT established the World Trade Organization (WTO), which has replaced GATT as the world forum for trade negotiations.

The World Trade Organization (WTO) is a permanent forum for negotiating, implementing, and monitoring international trade and mediating trade disputes among its 150 members.

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International Monetary Fund (IMF)

The International Monetary Fund (IMF) was founded in 1945 and is now affiliated with the United Nations.

The IMF was formed to monitor global financial developments, provide technical advice and training, provide short-term loans to countries that are unable to meet their financial obligations, and work to alleviate poverty in developing economies.

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The World Bank

Officially known as the International Bank for Reconstruction and Development, the World Bank was founded to finance reconstruction after World War II and is now involved in hundreds of projects around the world aimed at addressing poverty, health, education, and other concerns in developing countries

Is a United Nations agency owned by its 187 member nations.

Trading Blocs

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• North American Free Trade Agreement (NAFTA)

• European Union (EU)

• Asia-Pacific Economic Cooperation Council (APEC)

Trading blocs: Organizations of nations that remove trade barriers among their member countries and establish uniform barriers to trade with non-member nations

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North American Free Trade Agreement (NAFTA)

United StatesUnited States

CanadaCanada

MexicoMexico

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The European Union (EU)

MinimizingMinimizing EstablishingEstablishing

Local RegulationsLocal Regulations

Variations in Variations in Product StandardsProduct Standards

Trade ProtectionismTrade Protectionism

GlobalGlobalProduct StandardsProduct Standards

Consumer ProtectionConsumer Protection

Environmental Environmental ProtectionProtection

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The Asia Pacific Economic Cooperation Council (APEC)

The Asia Pacific Economic Cooperation Council

(APEC) is an organization of 21 countries that are

making efforts to liberalize trade in the Pacific Rim (the

land areas that surround the Pacific Ocean). Among

the member nations are the United States., Japan,

China, Mexico, Australia, South Korea, and Canada.

APEC has a long-term goal of liberalizing and

simplifying trade and investment among member

countries and helping the region as a whole achieve

sustainable economic growth.

The Economic and Monetary Union

©2007 Prentice Hall3-28

EconomicEconomicImpactImpact

EconomicEconomicImpactImpact

CurrencyCurrencyExchangeExchange

CurrencyCurrencyExchangeExchange

CentralizedCentralizedBankingBanking

CentralizedCentralizedBankingBanking

CurrencyCurrencyUnificationUnification

CurrencyCurrencyUnificationUnificationThe EURO

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Members of Major Trading Blocs

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Members of Major Trading Blocs

Difficulties in the Global Business Environment

• Unique laws

• Customs

• Consumer preferences

• Ethical standards

• Labor skills

• Political forces

• Economic forces

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The Global Business Environment

Culture:A shared system of symbols, beliefs, attitudes,

values, expectations, and norms for behavior.

Stereotyping :Assigning a wide range of generalized attributes,

which are often superficial or even false, to an individual based on his or her membership to a particular culture or social group

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The Global Business Environment

Ethnocentrism:Judging all other groups according to the

standards, behaviors, and customs of one’s own group

Successful global business leaders recognize and respect differences in language, social values, ideas of status, decision-making habits, attitudes toward time, use of space, body language, manners, religions, and ethical standards

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Cultural Differences In Global Cultural Differences In Global BusinessBusiness

• Consider the other person’s customs.Consider the other person’s customs.

• Deal with the individual.Deal with the individual.

• Clarify your intent and meaning.Clarify your intent and meaning.

• Adapt your style to the other person.Adapt your style to the other person.

• Show respect.Show respect.

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Legal Differences Legal Differences In Global BusinessIn Global Business

Forms of International Business Activity

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International Business Activity

Importing, the buying of goods or services from a

supplier in another country, and exporting, the selling of

products outside the country in which they are produced,

have existed for centuries.

Exporting, one of the least risky forms of international

business activity, permits a firm to enter a foreign market

gradually, assess local conditions, then fine-tune its product

to meet the needs of foreign consumers.

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Licensing is another popular approach to international

business. License agreements entitle one company to use

some or all of another firm’s intellectual property (patents,

trademarks, brand names, copyrights, or trade secrets) in

return for a royalty payment.

Some companies choose to expand into foreign markets

by franchising their operation. By franchising its

operations, a firm can minimize the costs and risks of global

expansion and bypass certain trade restrictions.

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A strategic alliance is a long-term partnership between two or more companies to jointly develop, produce, or sell products in the global marketplace. To reach their individual but complimentary goals, the companies typically share ideas, expertise, resources, technologies, investment costs, risks, management, and profits.

A joint venture is a special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents.

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Companies with a physical presence in numerous countries are called multinational corporations (MNCs). Since 1969, the number of multinational corporations in the world’s 14 richest countries has more than tripled, from 7,000 to 24,000.

Some multinational corporations increase their

involvement in foreign countries by establishing foreign direct investment (FDI). That is, they either establish production and marketing facilities in the countries where they operate or purchase existing foreign firms.

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International Business ActivityInternational Business Activity

Importing and ExportingImporting and Exporting

Licensing and FranchisingLicensing and Franchising

Strategic Alliances Strategic Alliances and Joint Venturesand Joint Ventures

Foreign Direct InvestmentForeign Direct Investment

OwnershipOwnership FinancialFinancial RiskRisk

LowLow LowLow LowLow

LowLow LowLow LowLow

ModerateModerate ModerateModerate ModerateModerate

HighHigh HighHigh HighHigh

Common FormsCommon Forms

Levels of CommitmentLevels of Commitment

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Strategic Approaches to Strategic Approaches to International MarketsInternational Markets

Multi-domestic

Global

Transnational

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Strategic Approaches toStrategic Approaches to International Markets International Markets

In the multidomestic strategy, a company

creates highly independent operating units in each

new country, giving local managers a great deal of

freedom to run their operations almost as though they

are independent companies.

A decentralized approach to international expansion in which a company creates highly independent operating units in each new country.

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Strategic Approaches toStrategic Approaches to International Markets International Markets

In the global strategy, a company embraces the notion of economic globalization by viewing the world as a single integrated market.

A highly centralized approach to international expansion, with headquarters in the home country making all major decisions

In the transnational strategy, a company uses a hybrid approach as it attempts to reap the benefits of international scale while being responsive to local market dynamics.

Functional Strategies for International Expansion

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Applying What You’ve Learned

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1. Explain why nations trade and describe how international trade is measured

2. Discuss the nature of conflicts in global business, including free trade and government interventions into international trade

3. Identify the major organizations that facilitate international trade and the major trading blocs around the world

Applying What You’ve Learned

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4. Discuss the importance of understanding cultural and legal differences in the global business environment

5. Define the major forms of international business activity

6. Discuss the strategic choices that must be considered before entering international markets

Documents

3-1 The Global Marketplace Chapter 3. Chapter 3 Objectives Explain why nations trade and describe how international trade is measured. Discuss the nature